ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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AD increases
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AD decreases
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Nothing, they cancel each other out yo’
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massive deficit and debt issues.
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AD and AS both increase.
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Detailed explanation-1: -In the most general sense (and assuming ceteris paribus conditions), an increase in aggregate demand corresponds with an increase in the price level; conversely, a decrease in aggregate demand corresponds with a lower price level.
Detailed explanation-2: -A contractionary fiscal policy means a rise in taxes and a decrease in government expenditure. This causes aggregate demand which means a fall in prices. The decreased demand also leads to a decrease in the real GDP.
Detailed explanation-3: -The initial change in spending times the spending multiplier gives you the maximum change in GDP (5 x $1000 = $5000). The original $1000 increase in government spending can increase GDP by a maximum of $5000 with an MPC of . 8. Note: The multiplier works the same in reverse.
Detailed explanation-4: -Income and Wealth As household wealth increases, aggregate demand typically increases. Conversely, a decline in wealth usually leads to lower aggregate demand.